Qld Government should sell assets – further spending cuts would weaken economy further

Given the weakness in the Queensland economy in recent months, it’s unsurprising Government revenues have fallen short of forecast levels, and the Government is considering  asset sales recommended by Peter Costello’s Commission of Audit, as reported by the Courier-Mail this morning:

A MASSIVE decline in revenues could force the Newman Government to adopt many of the Costello Review’s most controversial recommendations, including asset sales.

The Courier-Mail can reveal the Government’s Budget in June will predict a fiscal deficit for 2013/14 of more than $8 billion, compared to the $4.6 billion estimated in November.

Combined with this year’s deficit of $10 billion, the total red ink racked up by the Government could exceed $18 billion by the middle of next year if no action is taken.

Huge writedowns on stamp duty, royalties and payroll revenue predictions are responsible for the bulk of the state’s fading fiscal fortunes.

The deficit figure comes despite the Government reining in spending by more than $5.5 billion last year by cutting thousands of public servant jobs and cancelling funding for programs.

The Government should sell assets, particularly electricity businesses Energex and Ergon, so it can pay down debt and reduce its interest bill as soon as possible. Trying to repair the budget through further spending cuts, which the Courier-Mail reports is a possibility being explored, would be counter-productive. The State Government exerts a major influence on the Queensland economy, particularly on the construction sector, and further spending cuts would mean the recent economic weakness would continue for many more months, and would actually risk additional declines in revenue if the economy worsens as a result.

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5 Responses to Qld Government should sell assets – further spending cuts would weaken economy further

  1. The Happy Hillbilly says:

    Which assets should they sell Gene (apart from Energex and Ergon)? Don’t Energex and Ergon earn them a positve rate of return?

    • Gene Tunny says:

      Yes, they do. Upon reflection they’re probably not the best examples to use, because the loss of the dividend to Government will subtract from revenue, offsetting reductions in spending from lower interest payments as debt is paid back. Still I think it’s important to get our debt paid off quickly so we can regain our AAA credit rating and reduce overall borrowing costs. Selling off Energex and Ergon would be a good start, given that I can’t see any compelling case for keeping them in public ownership.

      Regarding other assets, under-utilised properties owned by the State Government across Queensland, especially TAFE campuses no longer needed, are obvious examples.

  2. The Happy Hillbilly says:

    Thanks for the reply Gene.

    As a Queenslander myself, your blog looks interesting to me. I have no formal training in economics but I do have a strong laypersons interest in the subject. It’s good to find an economics blog focussed on my home state.

    As a further note, my wife and I are both public servants (at the “coalface” of service delivery, not in the bureaucracy) so I’m not exactly a fan of the Newman governments approach to economic management. We are both still employed and I’m not convinced that either of us will go owing to the basic service delivery nature of both of our jobs, but it is an uncomfortable feeling knowing that the sword of Damocles may still be hanging above your head.

    Having read a number of your posts, I can see that you and I are not going to agree on all issues but that doesn’t matter. The school of thought that I am most familiar with (Modern Monetary Theory) tends to be more focussed on the national and international level. Sub-national governments are a different kettle of fish and I hope that reading and commenting on your blog will help to broaden my understanding, whether I agree or not (I’m sure it will).

    Cheers.

  3. John Yesberg says:

    Other things being equal, I agree it would be better to have a AAA credit rating than AA+. Can you point me to any numbers that show the actual cost of funds with different ratings?

    I understand that “Moody’s says the state must reach a sustainable surplus for its outlook to return to stable” (ABC News, Nov 2012). Will selling assets (ports, Energex, Ergon, etc) lead to a sustainable surplus?

    Is it safe to assume that Queensland can borrow money more cheaply than most investors/speculators? If so, an asset (like Energex or Ergon) that is profitable for an investor will be even more profitable for Queensland, and conversely an asset that is not profitable for Queensland will be even less profitable for an investor. For such an asset to be attractive to investors, either the price will need to be low (bad value for Queensland), or the investors will need to have ways to extract higher yield (higher electricity prices for Queenslanders).

    I think it only makes sense to sell an asset if it’s a lot more valuable to a buyer than it is to the seller. That may be the case for some currently-unused real estate. (However the discount rate for Queensland would be much lower than for private investors, so being unused in the short term hardly matters – it’s whether the land would be valuable to Queensland in the long term.)

    In principle, the government could sell all of its assets – schools, hospitals, police, roads, power stations, etc – and have no debt. (Hurrah!) Taxpayers wouldn’t have to pay any interest on government debt. But then they would have to pay increased charges for using all those assets. Those charges would have to cover not only the *investor’s* interest bills (larger than the goverment’s), but also their profit margin. Given the poor profitability record of infrastructure such as tunnels and roads, you’d expect any investor to have a pretty big margin to cover the risk. As a general rule, it would seem to make more sense for taxpayers to fund these assets as cheaply as possible – i.e. with government debt rather than private debt.

    The issue of government vs private productivity will always arise. Perhaps a private company can run things more efficiently. Maybe they can sack people more quickly, and reduce the conditions for people at the bottom. But they’ll have to triple (at least) the salaries of those at the top – remember QR National CEO going from $900k to $6M – Hockridge seemed very keen on privatisation. There is certainly some scope for productivity improvement, but I’m not convinced there’s enough fat to cover the increased profit requirement. (Maybe the difference between those who are for and against asset sales simply comes down to their assessment of how much fat there is.)

    To reach a sustainable surplus, it makes much more sense to cut expenditure or increase taxes. These are certainly harder to sell to the electorate. But even if the government can convince the electorate that asset sales will lead to a sustainable surplus, can it fool the ratings agencies? Have the ratings agencies commented on whether asset sales will lead to a better credit rating?

    John.

    • Gene Tunny says:

      Thanks for the comments, John. To work out the difference between AAA and AA+ you can compare interest rates on Commonwealth Govt (AAA) and Qld Govt (AA+) bonds. These figures are reported by the QTC in its weekly economics and markets review, but it appears it’s only available by email subscription. I can put you in touch with someone at QTC if you’re interested in subscribing to it. The latest review reports an interest rate for a ten year Commonwealth Govt bond of around 4.0% compared with a Qld Govt bond of 4.4%. Now the Commonwealth Govt gets an advantage because it’s a national govt (probably around 0.2% or 20 basis points) so the cost of Qld not being AAA is probably the extra 0.2% on top of that (i.e. if we had AAA the interest rate we borrow at might be 4.2% instead of 4.4%).

      Regarding some of your other questions…

      Selling assets won’t necessarily lead to a sustainable surplus. That will depend on the Govt keeping expenditure growth under control over the long-term.

      I can’t recall whether the ratings agencies have explicitly said asset sales would help retore our AAA rating, but, based on the well known rules of thumb they use, if we can get our debt down to around $50 billion, so its roughly the same as Qld Govt revenue, they’d have to seriously consider restoring the AAA rating.

      Good point about the State Govt being able to borrow money cheaper. However, when making investment decisions, it needs to consider the risk of the investment. Govts should be earning a higher rate of return than the Govt bond rate on their capital invested in Govt businesses to reflect the risks involved. I’ll try to expand on this in a future post because it’s an important point.

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